“No one ever lost money after making a profit.” —Bernard Baruch
RWA is a trend, a market with huge potential, and will undoubtedly become a very hot topic in the near future.
The integration of real world assets (RWA) and blockchain technology is a major technological advancement and a revolution that makes finance more open, transparent and interconnected.
So, what exactly are real world assets (RWAs) and how do they work?
I will dive a little deeper into the topic of RWA so that everyone can understand it better. (Throughout the article, I will refer to it by the acronym RWA).
We must first understand the concept of RWA.
Physical or tangible assets in the real world that have intrinsic value are called real world assets (RWAs). They include financial instruments such as loans and insurance contracts, as well as assets such as commodities and real estate.
RWAs are blockchain-based tokenized versions of these assets, making it easier to use them in online transactions and investments.
What potential does RWA have in the cryptocurrency world?
>> Liquidity: Tokenization can improve market liquidity by converting previously illiquid assets (such as real estate) into divisible and easily tradable tokens.
>> Accessibility: Venture asset management on the blockchain enables a wider audience to invest in high-value assets by lowering the minimum investment amount and entry barriers.
>> Transparency and security: Blockchain provides an immutable record of ownership and transaction history, making asset management more secure and transparent.
>> Financial Product Innovation: Risk asset management opens the door to cutting-edge financial products that can lead to more dynamic financial markets, such as fractional ownership and asset-backed lending.
What is the difference between regular real-world assets (RWA) and tokenized RWA?
Traditional RWA:
Definition: Traditional RWAs include tangible assets such as machinery, real estate, or commodities such as gold and oil. These resources are used in economic activities and have intrinsic value.
Ownership and transactions: Ownership is often recorded in a central database or via paper certificates. These assets are often traded through multiple intermediaries, which increases transaction costs and delays.
Liquidity: Traditional RWAs are generally less liquid than digital assets. The process of selling these assets can be lengthy and complex due to the need for physical valuations, legal inspections, and finding willing buyers.
Risk assets with tokens:
Definition: Tokenized risk assets are digital representations of traditional real-world assets based on blockchain. Each token represents a share, share or ownership of the underlying asset.
Ownership and Trading: Tokenized risk asset ownership is represented on the blockchain as digital tokens that provide immutability and transparency. This makes transactions simpler, faster, and requires fewer middlemen.
Liquidity: Tokenization improves the liquidity of risky assets by allowing fractional ownership and removing barriers to entry for investors. For example, investors can purchase tokens that represent part of an asset instead of the entire asset.
Example:
Imagine a commercial building valued at $10 million. In the past, this building would be purchased or sold in its entirety, often involving large amounts of capital and multiple parties such as banks, brokers, and lawyers.
Thanks to tokenization, the building can be represented by one million tokens, each worth $10. Tokens represent a fraction of ownership in a building, and investors can buy any number of them. Since this process simplifies transactions, a wider audience can now take advantage of investment opportunities.
What types of assets are eligible for tokenization?
1. Real Estate
One of the most popular tokenized assets is real estate, which gives users the opportunity to own commercial and residential properties.
The potential for greater liquidity in this asset class will open up investment opportunities and simplify the management of rental yields and other income through smart contracts.
. Commodity:
Commodities such as gold, oil, and agricultural products are examples of commodities. More open pricing and easier entry into markets that are typically high barriers to entry are two benefits of tokenization.
3. Artwork:
Including sculptures, paintings and other priceless works of art…
By using art tokens, affordable art can be more widely owned and monetized. Additionally, artists can still retain ownership and profit from a portion of the sales.
.intellectual property:
Including software code, copyrights and patents...
Facilitating the licensing and commercialization of intellectual property. In order to raise funds and maintain a degree of control over their creations, artists may choose to sell partial interests in their works.
Enhanced liquidity, reduced transaction costs, and easier access to investment opportunities are the advantages of asset tokenization.
However, the current state of RWAs lacks clear regulation, may present cybersecurity risks, and requires a robust set of technical systems to securely process these asset transactions.
How does RWA work?
Tokenization is a blockchain technology that aims to solve the problem of converting ownership of physical assets into digital tokens.
With each token representing a portion or fraction of an asset, trading, transfer, and management of assets becomes easier.
Consider the following scenario: You own a house worth $400,000. With tokens, you can produce 400,000 tokens, each worth $1. On the blockchain platform, these tokens can be bought, sold, or traded.
What blockchain technology means for the tokenization process
With the help of blockchain technology, tokens can be issued, tracked and traded on a decentralized, transparent and secure ledger.
Efficiency of blockchain:
>> Blockchain ensures that transactions are tamper-proof and secure.
>> The public ledger records every transaction to ensure transaction transparency.
>> Cut expenses, increase productivity, and eliminate middlemen.
Examples of practical applications of blockchain technology:
Throughout 2023, the Ethereum blockchain processed over a million transactions per day without any outages.
Since thousands of nodes verify every transaction on a public blockchain, it is nearly impossible to alter the record.
According to a report by Deloitte, eliminating middlemen in financial transactions could save up to $20 billion per year.
To make the RWA tokenization process easier to understand, let’s look at a more practical example:
There is a business asset worth $100,000. The legality of this asset needs to be determined first so that it can be tokenized and legally traded.
100,000 tokens will be generated during the token creation process, each worth $1.
In this case, an asset is chosen for token issuance and management and is built on the Ethereum blockchain. (There are many types of blockchains, including Ethereum, Solana, BSC, etc.)
The tokens are then distributed to investors using an Initial Coin Offering (ITO).After the tokens are issued, they can be exchanged on the secondary market.
If the asset value rises to $200,000, then each token would be worth $2 at the time of the transaction.
This process increases liquidity in illiquid assets while also democratizing investment opportunities.
According to a report by Deloitte, the tokenized asset market could reach $24 trillion by 2027 as cryptocurrencies grow in popularity and open up new avenues for RWAs.
Source: World Economic Forum
Due to the decentralization of tokens and the ownership ratio, small investors now have more opportunities to participate in the market, thereby increasing liquidity. This portion can be traded more easily on the secondary market compared to traditional stocks.
Efficiency and transparency of transactions
Blockchain technology has proven particularly useful in industries such as real estate and supply chain management because it provides an immutable, transparent ledger of all transactions.
Many organizations have studied the following data on the effectiveness of blockchain technology:
>> Santander Fintech research estimates that distributed ledger technology could save $15-20 billion per year in financial services infrastructure costs (by 2022)
>> PwC research suggests that companies using blockchain technology could save up to $20 billion per year by 2022.
>> According to a McKinsey study, using blockchain could increase trade finance efficiency by about 30%.
>> According to research by the World Economic Forum, blockchain could create up to 21 million new jobs by 2025.>> According to Capgemini research, blockchain technology could save the insurance industry up to $10 billion per year by 2025.
>> According to research by Deloitte, the securities industry could save up to 60% in clearing and settlement fees by implementing blockchain technology.
>> According to research by IBM, using blockchain technology could save the healthcare industry up to 50% in fraud detection costs.
>> According to research by PwC, blockchain technology can save up to 50% of costs associated with compliance, auditing, and reconciliation.
>> Blockchain technology has the potential to reduce typical U.S. real estate transaction times from the current 30 to 60 days to just a few hours.
In the near future, the efficiencies blockchain offers when tokenizing RWAs will lead to many incredible outcomes.
The future of mass tokenization of assets and items, including valuable real estate, art, and even exotic assets such as wine or rare collectibles, is a current trend.
By 2020, sites like Securitize will have more than $500 million worth of tokenized assets, including private equity and real estate.
On sites like Masterworks, investors can buy shares in famous works of art for as little as $20.
The above data highlights the numerous benefits of implementing an RWA token.
But what are the issues that are causing problems and hindering the growth of RWAs?
Uncertainty about regulations for tokenized securities
The SEC’s 2023 lawsuits against multiple companies exposed the legal risks involved in offering unregistered digital asset securities.
The World Economic Forum claims that regulatory uncertainty could slow the adoption of digital assets, which could limit market growth by up to 20% per year.
In order for RWAs to thrive in the cryptocurrency space, regulatory clarity is essential. Tokenized securities are still being classified and regulated by regulators.
Therefore, legal and compliance barriers are critical.
Technical defects and the possibility of fraud.
Since blockchain technology is still relatively new, it is inevitable that there will be many hacking attacks and technical vulnerabilities.
Some of the hacking incidents that shocked the crypto community are as follows:
The 2022 Ronin Network hack resulted in a total loss of $625 million.
According to Chainalysis, fraud and hacking attacks in 2022 resulted in approximately $3.8 billion worth of cryptocurrency being stolen.
According to the Defillama website, hackers have stolen $7.82 billion since 2016. (That’s a pretty significant amount.)
While blockchain improves transparency, it also presents new risks.
Mitigating these vulnerabilities and protecting investor assets requires investment and building security infrastructure.
This is a brand new market and a significant portion of investors do not understand RWA or cryptocurrency trading. The growing interest of cryptocurrency investors proves that they are willing to take risks. But investors must understand the advantages and risks of RWA in cryptocurrency.
I will list the RWA tokens worth watching for each asset class at the end.
History and future prospects of various RWA markets
>> The tokenized real estate market is still relatively new, but many organizations estimate that it could reach $1.4 billion by 2027.
>> Trade finance and supply chain management involve many intermediaries and complex processes. Blockchain can simplify these processes, reduce fraud and increase openness.
Trade finance and supply chain management are complex processes involving numerous intermediaries. Blockchain can increase transparency, reduce fraud and simplify these processes.
>> Blockchain-based trade finance solutions are expected to grow at a compound annual growth rate (CAGR) of 20% from 2022 to 2030, with the market valued at approximately $9 trillion in 2021.
>> The global art market will reach US$65 billion in 2022.
>> Defillama data shows that as of May 2024, the total locked value (TVL) of the Defi market is $90.8 billion, of which the RWA network accounts for $6.57 billion. RWA integrated projects are expected to gain a considerable market share, and TVL may reach $10 billion by 2025.
Source: Deflama — Total Defi TVL
Source: Defillama — RWA TVL
What role does Defi (decentralized finance) that I mentioned earlier play in the RWA token?
The following platforms, namely Centrifuge and MakerDAO: simplify the RWA tokenization process:
Centrifuge enables companies to tokenize notes or property, which can then be used as security for loans.
Lending: DeFi protocols allow loans using RWA as collateral.
One example is the use of tokenized real estate to obtain financing on platforms such as Aave or Compound.
Yield Farming and Staking: Tokenized RWA can be staked in liquidity pools to generate interest or used for yield farming techniques. This provides a second source of income for asset owners.
The effectiveness of RWA programs depends on regulatory compliance, especially Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.
Tokenized assets are subject to various regulations in different countries:
The definition of a security token is subject to strict regulations set by the U.S. Securities and Exchange Commission (SEC).
To provide a comprehensive framework for crypto-assets, including RWAs, the EU is working on regulating markets in crypto-assets (MiCA).
We can clearly see the huge potential of this market.
Source: X.com
Finally, I list a few RWA projects that I think hold promise for the future.
When I was investing in cryptocurrencies, I learned that tokens with reasonable market caps attracted more whales and sharks than low-market cap projects.
Whales are more attracted to projects with larger market caps. Liquidity is everything.
1. Ondo Finance ($ONDO): Finance/Structured Products - The main goal of Ondo Finance is to develop structured financial products that provide opportunities for high yields and stable returns. It offers a range of investment options that cater to different risk preferences, striving to bridge the gap between traditional finance and DeFi.
Ondo’s “Challenges and Potential”
2. Pendle ($Pendle): Finance - Pendle is a financial asset that specializes in tokenizing and trading future earnings.
Profits are rolling in: Pendle's new long-term pool
3. Polymesh ($POLYX): Financial/Blockchain Infrastructure – Security tokens are used in regulated financial markets, and Polymesh is built for them.
4. Centrifuge ($CFG): Finance/Real World Assets (RWA) — Centrifuge connects decentralized finance (DeFi) to tangible assets like invoices.
5. Goldfinch ($GFI): Finance – Goldfinch focuses on real-world lending and provides a decentralized credit protocol.
6. Creditcoin ($CTC): Finance – Creditcoin uses blockchain technology to enhance credit history and trust in the lending market.
7. Propy ($PRO): Real Estate – Propy uses blockchain technology to make real estate ownership and transactions easier.
8. AllianceBlock Nexera ($NXRA): Finance – AllianceBlock Nexera connects decentralized finance (DeFi) with traditional finance.
9. CANTO ($CANTO): Blockchain Infrastructure – CANTO provides platforms and tools for decentralized applications (dApps) as part of its DeFi infrastructure.
10. Polymath ($POLY): Financial/Blockchain Infrastructure – Polymath makes it easier to create, issue, and manage security tokens.
11. LEOX ($LEOX): Finance/DeFi — LEOX is a decentralized finance company specializing in providing different financial services.
12. Stobox ($STBU): Finance/Tokenization – Stobox provides tokenization services, allowing for the digitization of securities and assets.
13. LandX Governance Token ($LNDX): Real Estate/Agriculture – LandX connects agricultural land investments with blockchain-based governance.
14. Realio ($RIO): Real Estate/Finance – Realio improves transparency and liquidity by integrating blockchain technology with real estate investing.
15. Wadzpay ($WTK): Payments/Finance – Wadzpay hopes to update payment systems using blockchain technology to make transactions faster and more secure.
Good luck and see you next time!
I will be posting project research and essay updates regularly, so stay tuned for more information and to stay up to date!
